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April 2012 - Simon Lord outlines three different approaches to franchising and invites comment from the experts

If you have a successful business of any kind, then looking at the winners of this year’s New Zealand Franchise Awards should be inspiring. Names like Columbus Coffee, Paramount Services and SKIDS testify to the success that can be achieved through the franchise model in very different industries, while relatively new start-up GroutPro is already finding success overseas. But when you decide to investigate franchising your own business, where do you begin? It’s important, because how you start can make a very big difference to what you eventually achieve.

Of course, no two people’s journeys into franchising are ever the same, but here at Franchise New Zealand we recently received three emails within 24 hours that broadly summed up the different approaches that most people take. The first came from somebody who was taking what we might call the DIY approach; the second from an intending franchisor keen to protect their business and not make any mistakes; while the third was from a company that had appointed the wrong consultant to franchise their business. The third email opened with, ‘[This experience] has totally put us off the franchise industry,’ and was the most distressing of all as they had already wasted a lot of time and money.

We therefore decided to talk to some of New Zealand’s most experienced franchise consultants to see what advice they would offer to people and companies in the early stages of their own journey towards franchising.

The first email read as follows: ‘I am trying to produce a franchise manual. I am unsure where I should start. I was wondering if you have a franchise manual template that you could email me?’

As publishers, we probably see more of this sort of request than the consultants do. We are always happy to point people towards articles and sources of advice that will help, but the idea that there could be a ‘standard template’ for a franchise manual is a worrying one. Franchising can be applied in many different ways to many different types of business and, like snowflakes, no two successful franchises are identical – similar, certainly, but never identical.

Dr Callum Floyd, director of Franchize Consultants (NZ) Ltd, says, ‘In my view, a standard template manual – like a standard template franchise agreement – has no place in franchising, apart from helping people to understand some of the basic tenets involved. Both the franchise manual and the franchise agreement should be the result of considerable franchise-specific strategic planning that is tailored to the business, the market and environment it operates within – as well as the owner’s objectives.

‘That’s especially true in New Zealand where, due to limited market size and potential for units, the tolerance for errors in franchise system design is tiny. As an example, a 0.25 percent difference in royalty could make the world of difference to either a franchisor or franchisee. This only serves to highlight the importance of proper up-front, franchise-specific planning.’

David McCulloch of The Franchise Coach, himself an experienced franchisor, has had similar requests for ‘standard’ formats – and more. ‘Not long ago, we had one budding franchisor bring their “finished” manual for us to review. His request was, “Please fill in the gaps!” To our consultant’s horror, it was immediately very obvious that the manual was based on, and in some cases directly copied from, another franchise’s manual.

‘While it might be reasonable to look at other manuals to see what areas they cover, copying from them is both dumb and illegal. You would only do it if you are lacking funding – in which case you should not be attempting to franchise in the first place – or are ignorant of copyright law, or totally misunderstand the role of a franchise manual, which is to set down the operating system, techniques and intellectual property which make the franchise unique.

‘What the franchisor who copies another system has created is an incomplete franchise,’ David stresses. ‘They have not only reduced the potential value of their own business by doing the job badly – they have exposed themselves to potential litigation from the franchise system they have copied and from their own franchisees who have not been provided with well-developed and detailed instructions on how to operate the business.

‘A franchise is a “business in a box,” and putting the wrong things into the box is just as bad as leaving essentials out. Fortunately, in the case of our enquirer we were able to convince them to engage us to re-examine the business and re-write the manuals.’

Going back to the Franchise New Zealand inbox, the second email of the day was more detailed. An intending franchisor explained the nature of the business they operated and the experience of those behind it, outlined the planning and research undertaken so far, and even mentioned the necessary protection of the intellectual property in the business. It then admitted, ‘Franchising is not something [we] have ever been involved in ­– it is a new challenge! We would like to start on the right track and are keen for some helpful guidance.’

Although their business is in its early stages and franchising is still some way away, these entrepreneurs are aware of the value of what they have already created but also realise there is a lot they don’t know.

‘We are fortunate that there are many companies that choose to take this correct approach and entrust us with assisting and guiding their journey,’ says Callum Floyd. ‘Typically the development time is considerable, spanning many months and sometimes more than a year, depending on the size and complexity of the business being franchised.

‘It is not a cheap process, nor should it be. As consultants, we spend a lot of time with clients in order to understand their business. At the same time, the client gets to learn a lot about franchising, including the structural options available to them and the reasons for choosing a particular approach. This stands the new franchisor in good stead for when they launch. They know they have a franchise system to be proud of and they know the thinking behind the structure. Importantly, they also know how to manage it,’ Callum says.

And, as David McCulloch points out, franchising a business requires input from a number of different specialists. ‘We recommend our clients build a team around them from day one including a franchise-experienced consultant, lawyer and accountant as well as IT and marketing specialists. Having your team in place from the early stage of development will provide you with the broadest knowledge base and result in a purpose-built franchise model.

‘Do you know how to select these people? There are articles on this website that will give you some good questions to ask professional advisors, but in reality you can’t know what you don’t know so you need to undertake good due diligence when selecting them. If I were you, my question to the franchise consultant would be, “Please give me three references of three franchise systems you have developed from scratch in the last 12 months and before.” Looking into their past is one way to predict the future.’

That brings us on to the third, most distressing email. This came from a company that had appointed a firm of consultants to franchise their business for them without adequately researching their track record. The consultants chosen had made many claims about their professional abilities and the work they would undertake, and the would-be franchisor was well down the track (having paid a large amount of money) when they discovered issues that they felt meant they were being taken for a ride. Some serious allegations against the consultant are now being investigated; however, the client has wasted resources and no longer has the inclination to proceed with franchising a business that might, with better guidance, have enjoyed considerable national and even international success.

‘Unfortunately there are some rogue consultants out there in the market place,’ says Callum Floyd. ‘But it surprises me that in this day and age some people – even experienced and successful business people – do not do basic research that could easily uncover who the “good guys” are. We strongly advocate asking for testimonials from real clients that have achieved real results.’ It’s also worth checking out the company and people involved through the Companies Office website.

David McCulloch echoes the same concerns. ‘Has the consultant been around for long enough to have real experience – and will they still be around in the years ahead? When you recruit your first franchisee and you start to learn about life as a franchisor, you need to know that your consultant will be available to fine-tune the system and provide you with the support necessary to make it successful for both you and your franchisees. You need to consider the longer term when choosing your franchise development team, and be confident that they will be around for perhaps five to ten years. Change may be constant, but your advice needs to be consistent to ensure that it is in keeping with your franchise model and culture.

According to Callum Floyd, there is only one way to franchise an established business properly: ‘That involves using a team of specialist advisors who are expert and experienced in franchising,’ he says. ‘The franchise consultant’s role is crucial for:

a) evaluating the appropriateness of franchising the business for the owners.

‘Every single failed or under-performing franchise system I have seen to date has had issues rooted in that initial franchise development process – although that may not have been the only reason for their problems. Typically, they did not engage a skilled franchise consultant at the beginning. Instead, they took shortcuts and committed themselves to franchising without proper evaluation and planning to ensure that franchising really was the appropriate growth option for their company or that the appropriate structure and systems were in place. They tried to do it themselves without having the necessary experience, appointed the wrong consultant, or briefed a franchise lawyer without doing the background work because they thought that a good agreement was all they needed.’

And Callum ends with a stern message. ‘It really astounds me that some new franchisors are happy to ask prospective franchisees to invest more in establishing an outlet for their concept than they themselves were willing to invest in establishing a quality franchise system in the first place. Such an attitude does not bode well for the future success of the franchise system and the franchisee’s investment.’

Our thanks to Callum Floyd of Franchize Consultants and David McCulloch of The Franchise Coach for their assistance in preparing this article, which first appeared in Franchise New Zealand magazine Volume 20 Issue 04.